We wouldn’t trust a police commissioner to oversee a corruption investigation into himself. Even if this hypothetical commissioner were innocent of any wrongdoing, if his investigators answered directly to him, the public couldn’t be sure he hadn’t tainted the investigation.
The same logic should apply at the Federal Reserve, especially now that Chair Jerome Powell is personally tied up in a trading scandal highly similar to the one dogging his Vice Chair, Richard Clarida. But the structure of the Federal Reserve system means Powell is effectively the overseer of investigation into his own conflicts of interest. This is yet another reason for Congress to conduct its own investigation into the Fed leadership’s insider trading, and for Biden to replace Powell.
The American Prospect’s Robert Kuttner tracked down the actual dates of Powell’s multi-million dollar financial trades last year, and reports that Powell sold stakes worth between $1 million and $5 million in a broad stock index fund on October 1, 2020. October 2020 quickly went on to be one of the worst months for the stock market that year, in large part due to Trump administration policies which Powell would have known about (he spoke with then-Treasury Secretary Steven Mnuchin four separate times on October 1st), as well as a gloomy report on the minutes from the Fed’s meeting the previous September.
In other words, it’s highly probable that Powell guessed in advance that October would be a rough month for stocks, and made a multi-million dollar choice to get out. This is similar to Vice Chair Richard Clarida’s multi-million dollar trades in February 2020, the day before Powell himself issued a market-moving statement indicating that the Fed would make unprecedented market interventions.
Those interventions are also why these index fund sales matter a great deal. Some commentators scoffed at Kuttner’s story, since reformers in the past have called for officials to invest in the types of index funds Powell did to avoid conflicts of interest. But that standard only makes sense if the Fed isn’t singularly impacting almost the entire stock market, as it was in October 2020 through its unprecedented market interventions due to COVID-19. Investing in index funds does not exempt officials from adhering to other ethics rules; specifically in this case, from avoiding even the appearance of a conflict of interest or from trading on inside information. While most officials do not have the power to move markets writ large, Fed leaders do, complicating matters even further. It’s disqualifying that Powell doesn’t seem to recognize this.
Powell’s conflicted trading only makes the flaws with the Fed’s response to these scandals more glaring. There is a potentially dangerous precedent being set right now.
The central bank has tried to quiet criticism mainly by pointing to an investigation opened by its Inspector General. But that Inspector General, Mark Bialek, is appointed by the Fed’s Board of Governors, and can be dismissed by a vote from four of their six members. Two Board members, Clarida and Powell, are already in hot water. Their close ally, former Vice Chair for Supervision Randal Quarles, has his own morass of private equity investments which were no doubt affected by the Fed’s pandemic activities. They’d just need one more vote on a Republican-dominated highly-loyal Board to dismiss Bialek, a structural power imbalance which renders Bialek non-independent through no fault of his own.
The issues with IG independence are a microcosm of the broader problem with the Fed’s power structure. The Chair is the sole executive officer of the central bank, meaning all of the institution’s staff ultimately answer solely to him. Powell’s response to these trading scandals has been an in-house investigation, rather than calling on genuinely independent attorneys from the Justice Department or outside of the federal government. That means he employs the people investigating him.
Notably, Powell’s public stance on the scandals has solely been to gesture toward new rules in the future to prevent this activity. Certainly, some new rules must be generated, including requiring regional bank presidents to submit financial disclosure forms before their reappointments. Powell himself would control this rule proposal process as well as the Fed’s executive officer.
But the most important current ethics rule at the Fed as at any federal government institution is to avoid “even the appearance of a conflict of interest.” Powell himself, we now know, has violated this. If the lesson from the current scandal is that there will be no repercussions when rules are violated by amiable powerful people, why do we think new rules will make the situation any better?
It’s particularly notable that Powell claims his transactions “were signed off on by government ethics officials.” We’d like to see which ethics officials in particular, and whether they are independent of the structures which report up to Powell — in other words, whether this was a Fed-internal check or not. (We’ve already sent FOIAs for this.) The standard of avoiding “even the appearance of a conflict of interest” is deliberately broad, and again, applies across the federal government. It’s difficult to see how an Office of Government Ethics official wouldn’t see a potential conflict in major transactions by a man which such total power over the financial sector at that time.
There are a few key takeaways for the President from this whole affair.
- Powell, Clarida, and Quarles’ activities are all suspect, and Powell’s prioritization of an investigation he controls personally is even more so. We would urge Powell to disclose his own 2021 trades at least as quickly as he would need to were the Fed under the STOCK Act’s purview, and urge him to bring a similar motion before the Board.
- If yet more damaging information were to come out of the Fed after a potential Powell re-nomination, that would be highly damaging to President Biden’s credibility. Imagine if Senate investigation turned up damaging documents, or a whistleblower came forward, after Powell had already secured a second term.
- The whole Federal Reserve system would benefit from scrutiny of all of its leaders. The investigative reporting website Wall Street On Parade reported independently on Atlanta bank president Raphael Bostic’s curious accounts at Morgan Stanley’s private bank. Lael Brainard made no trades whatsoever in 2020, so she is likely in the clear, but due diligence investigations are still necessary. The Federal Reserve is an institution clearly lacking in ethical safeguards and we support investigating all of its leaders skeptically, regardless of our preferences on matters of policy.
All of these facets — even independent of the problems with his actual policies — indicate that Biden ought not to renominate Powell.
PHOTO CREDIT: “Jerome H. Powell, governor of the Federal Reserve Board, discusses how markets currently function” by BrookingsInst is licensed under CC BY-NC-ND 2.0